Summary
An anticipatory hedge is a contract purchased in expectation of needing a commodity at a later date.

The basis is the difference between the cash and futures prices for a commodity. A trader is long the basis if he bought the commodity and hedged with a sale of futures contracts, or short the basis if he bought the futures as a hedge against a commitment to sell in the cash market. The basis has implications for the markets, its participants and the commodities traded.

A trader needs to be able to calculate the net results of long and short hedges in both rising and falling markets. She must also be able to determine net prices factoring in both hedged and unhedged positions.

Review

  1. A trader is long 100 wheat contracts and is concerned about rumors of rising prices so he shorts 50 contracts. This is an anticipatory hedge.

True

False


  1. In August, the November futures price for a commodity is $2 and the cash price is $1. For the last three years, the cash price in August was $1, but the November futures price was closer to $3. The December futures price is $1.80. Which statement is false?
    1. The basis is $1 under November.
    2. The market is in contango.
    3. The market is weaker than historical norms.
    4. The producer need not deliver immediately in the cash market.


  1. The implied repo rate
    1. is a proxy for the risk-free rate
    2. is a critical concept in agricultural commodity futures trading
    3. rises with futures prices
    4. approaches zero as the futures contract's delivery date near

Cash Market
Futures Market
Basis
May
Receives cash forward (July) bid at 128/cwt
Sells July ethanol futures at 138/cwt
-.10
July
Sells cash ethanol at 125/cwt in the spot
Buys July ethanol futures at 130/cwt
-.05
  1. Which statement is true about this chart?
    1. The market is in backwardation.
    2. The hedger gained 8 cents/hundredweight in the futures market.
    3. Prices are rising in the market.
    4. This is a long hedge.


  1. In a backwardation market, basis strengthens.
    1. False
    2. True


  1. Basis is impacted by all of the following items except
    1. Local supply and demand
    2. Substitute availability
    3. Margin
    4. Middleman's fees


  1. A long hedger may enter into an anticipatory hedge
    1. True
    2. False


  1. With contango
    1. Cash prices exceed futures prices.
    2. Near delivery month contracts are cheap relative to later months.
    3. Futures prices exceed cash prices.
    4. Cash and futures prices are identical at contract expiration.


  1. A hedge may
    1. Completely reduce risk.
    2. Partially reduce risk.
    3. Both a. and b.
    4. Either a. or b.


  1. All futures contracts offer delivery as a settlement option.
    1. False
    2. True





Answers

Related Articles
  1. Investing

    Hedging With ETFs: A Cost-Effective Alternative

    The benefits of ETFs for hedging are clear and investors of all sizes are taking notice.
  2. Trading

    Contango Vs. Normal Backwardation

    Learn about the futures curve and what its shape means for hedgers and speculators.
  3. Investing

    Contango Versus Normal Backwardation

    It’s important for both hedgers and speculators to know whether the commodity futures markets are in contango or normal backwardation.
  4. Investing

    How to Use Commodity Futures to Hedge

    Both producers and consumers of commodities can use futures to hedge. We explain, using a few examples, how to achieve commodity hedging with futures.
  5. Investing

    How To Lock In Low Oil & Gas Prices

    We provide a quick overview of how companies can manage the risk of adverse moves in commodity prices by hedging in the futures market.
  6. Trading

    A Beginner's Guide to Hedging

    Learn how investors use strategies to reduce the impact of negative events on investments.
  7. Trading

    How To Avoid Exchange Rate Risk

    What are the best strategies to avoid exchange rate risk when trading?
  8. Trading

    Hedging Basics: What Is a Hedge?

    This strategy is widely misunderstood, but it's not as complicated as you may think.
Frequently Asked Questions
  1. Can I add my higher income spouse's name to my Roth IRA in order to raise our contribution limits?

    IRS rules prevent you from maintaining joint Roth IRA accounts. However, you may accomplish your goal of contributing larger ...
  2. How do I retire?

    When considering how to plan for retirement, firstly think about the age at which you want to retire and the lifestyle you ...
  3. What are the top Social Security scams targeted at the elderly?

    Prevent Social Security scams by learning to recognize the most common types of scams that target senior citizens receiving ...
  4. What does a sample plan using the 4% retirement rule look like?

    Discover how the 4% retirement rule can work as part of a plan to achieve increasing retirement income if investments perform ...
Trading Center